Question

Businessman owns a contracting business, Ace Construction ["Ace"], which he started from scratch shortly after graduating from college. He began renovating old buildings in the downtown area of City for residential rental property in 2011. Ace owns a total of five buildings, including the land on which they sit. Four of the buildings are comprised entirely of luxury condominium units that provide cosmopolitan living accommodations for City's young, urban professional people . The fifth building provides housing for low-income families (which qualifies for the low income housing credit over a 10 year period). Ace was able to acquire all the properties for a total of $50,000 each in 2011. There is a $40,000 mortgage on each property. Ace has beautified all the grounds, including installing a swimming pool at each of the buildings in 2015, at a cost of $15,000 each. In 2016, Ace had to fix a leaky roof on one of the buildings, but other than that, the company has not incurred any other costs relating to the properties themselves. In order to renovate the acquired buildings, future newly acquired buildings, and to maintain all the properties, Ace invested in some equipment. In August, 2011, Ace traded a crane he paid $65,000 for a used small bulldozer from another local construction company worth $75,000, and paid the difference in cash. That same month, Ace bought two new heavy-duty trucks for $30,000 each. In October, 2014, Ace added a brand new tractor and three riding lawn mowers to its business equipment at a total cost of $100,000 and $20,000, respectively. By the year 2016, Ace had become so profitable that it was able to make thousands of dollars of charitable contributions each year thereafter. It also purchased a helicopter in 2015 so Businessman can now fly over nearby cities and scout out new investment opportunities. Ace has elected to have its taxable year be a fiscal year that begins each September.

The cost of fixing the leaky roof is:

1. ordinary and necessary

2. a business expense

3. a deductible expense

4. a depreciable expense

Select One:

A) 1 and 2 only

B) 1 and 3 only

C) 1, 2, and 3 only

D) 1, 2, 4, only

Answer 1

Answer will be (C) 1,2 & 3 only.

Justification:-

You can claim the cost of allowable repairs and maintenance, including:

• painting
• conditioning gutters
• maintaining plumbing
• repairing electrical appliances
• mending leaks etc.

To repair something means to fix defects, including renewing parts. It does not include total reconstruction.

You can't claim capital expenses, such as:

• substantial improvements to an item or property – for example, installing a new ceiling

You can generally claim a deduction for capital expenses under the general depreciation provisions (for items), or the capital works provisions (for property).

Therefore, in the above question the cost of fixing the leaky roof is ordinary & Necessary , a business expense & a deductible expense too.